LA SUERTE CIGAR & CIGARETTE FACTORY v. COMMISSIONER OF INTERNAL REVENUE (Consolidated with Case Nos. 7183, 7245, 7335, 7308, 7326 & 7267)

COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* LA SUERTE CIGAR & CIGARETTE FACTORY, C.T.A. CASE NO. 7151 Petitioner, C.T.A. CASE NO. 7183 C.T.A. CASE NO. 7245 - vers us - C.T.A. CASE NO. 7267 C.T.A. CASE NO. 7308 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, - versus- COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, - versus- COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X LA SUERTE CIGAR & CIGARETTE FACTORY, Pet itione r, - versus- COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, - versus- COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X 787

LA SUERTE CIGAR & CIGARETTE FACTORY, C.T.A. CASE NO. 7326 Petitioner, - versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X LA SUERTE CIGAR & CIGARETTE FACTORY, C.T.A. CASE NO. 7335 Petitione r, Members: - versus - ACOSTA, Chairperson BAUTISTA, and CASANOVA, JJ. COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. uJ L 03 2009 r; I0'-0oam x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x DECISION BAUTISTA, ,l.: This case is a consolidation of seven separate Petitions for Review, seeking the refund of the amount of ONE MILLION THIRTY-TWO THOUSAND ONE HUNDRED SIXTY-FIVE PESOS (P1,032,165.00) paid as excise taxes for alleged "unmanufactured" tobacco imported in the year 2003, broken down as follows: Case No. Amount 7151 p 115 515.00 7183 7245 172 800.00 7267 129 600.00 7308 176 850.00 7326 203,850.00 7335 74, 250 .00 TOTAL 159 300.00 p 1,032,165.00 ~' R R

Petitioner is a corporation organized and existing under the laws of the Philippines, with office address at Km. 14, West Service Road, South Highway, Parafiaque. Respondent is the Commissioner of the Bureau of Internal Revenue (BIR) authorized to perform the duties of his office, including inter alia, the power to decide disputed assessments or other charges, penalties imposed in relation thereto, pursuant to the provisions of the National Internal Revenue Code (NIRC), as amended . He holds office at the Fourth Floor, BIR National Office Building, Agham Road, Diliman, Quezon City. In the year 2003, petitioner imported various classes of unmanufactured tobacco on different dates. As a condition for the release of the imported unmanufactured tobacco from the Customs warehouse, petitioner was required to pay and actually paid excise taxes under protest. Petitioner immediately filed administrative claims for refund. The importation, the payment of excise taxes, and the filing of administrative claims are detailed as follows: Class of Imported Quantity of the Amount of Date of Payment Date of Filing Unmanufactured Tobacco Imported Unmanufactured Excise Tax Paid of the of Administrative C.T.A. Case No. 7151 Tobacco Excise Tax Claim Unmanufactured Canadian FC Tobacco February 2, 2005 Unmanufactured U.S. Burley Tobacco 39,600 kgs. p 29,700.00 20-Feb-03 Total 114,420 kgs. 85 ,815 .00 20-Feb-03 154,020 kgs. p 115,515.00 C. T.A. Case No. 7183 March 4, 2005 Unmanufactured Brazilian Burley Tobacco 57,600 kgs. p 43,200.00 31 -Mar-03 Unmanufactured U.S. 96,000 kgs. 72,000.00 31 -Mar-03 Burley Tobacco 76,800 kgs. 57 ,600 .00 3-Apr-03 Unmanufactured U.S. 230,400 kgs. Burley Tobacco p 172,800.00 Total C.T.A. Case No. 7245 April 8, 2005 Unmanufactured U.S. Burley Tobacco 96,000 kgs. p 72,000.00 7-May-03 Unmanufactured U.S. 76,800 kgs. 57 ,600 .00 7-May-03 Burley Tobacco 172,800 kgs. Total p 129,600.00

C. T.A. Case No. 7267 57,600 kgs. p 43,200.00 9-Jun -03 June 2, 2005 Unmanufactured Brazilian 178,200 kgs. 133,650.00 11 -Jun-03 August 8, 2005 Burley Tobacco 235,000 kgs. Unmanufactured Brazilian p 176,850.00 11 -Aug-03 September 8, 2005 F.C. Tobacco 39,600 kgs. 11 -Aug-03 October 6, 2005 Total 76,800 kgs. p 29,700.00 11 -Aug-03 96,000 kgs. 57 ,600 .00 14-Aug -03 C.T.A. Case No. 7308 59,400 kgs. 72 ,000 .00 Unmanufactured Brazilian 271,800 kgs. 44,550.00 24-Sep-03 F.C. Tobacco 24-Sep-03 Unmanufactured U.S. 39,600 kgs. p 203,850.00 Burley Strips Tobacco 59,400 kgs. 8-0ct-03 Unmanufactured U.S. 99,000 kgs. p 29,700.00 8-0ct-03 Burley Strips Tobacco 44,550.00 13-0ct-03 Unmanufactured Canadian 96,000 kgs. F.C. Tobacco 76,800 kgs. p 74,250.00 Total 39,600 kgs. 212,400 kgs. p 72,000.00 C. T.A. Case No. 7326 57, 600 .00 Unmanufactured Brazilian 29,700.00 F.C. Tobacco Unmanufactured Brazilian p 159,300.00 F.C. Tobacco Total C. T.A. Case No. 7335 Unmanufactured U.S. Burley Tobacco Unmanufactured U.S. Burley Tobacco Unmanufactured Malawi Burley T & T Tobacco Total On February 18, 2005, petitioner filed before the Court a Petition for Review, praying for a judgment ordering respondent to refund the amount of P115,515.00 for the excise taxes paid on 39,600 kilos of imported unmanufactured Canadian F.C. tobacco and 114,420 ki los of imported unmanufactured U.S. Burley tobacco. 1 On March 30, 2005, petitioner filed before the Court a Petition for Review to seek refund of the amount of P172,800.00 for the excise taxes paid on 57,600 kilos of imported unmanufactured Brazilian Burley tobacco and 172,800 kilos of imported unmanufactured U.S. Burley tobacco. 2 1 C.T.A. Case No. 7151 docket, pp . 1-7. /.'90 2 C.T.A. Case No. 7183, docket, pp . 1-8.

On May 6, 2005, petitioner filed another Petition for Review, praying for refund of the amount of P129,600.00 for the excise taxes paid on 172,800 kilos of imported unmanufactured U.S. Burley Tobacco. 3 Another Petition for Review was filed by petitioner before this Court on June 8, 2005, to claim refund of the amount of P176,850.00 for the excise taxes paid on 57,600 kilos of imported unmanufactured Brazilian Burley tobacco and 178,200 kilos of imported unmanufactured Brazilian F.C. tobacco. 4 On August 10, 2005, petitioner filed a Petition for Review to seek refund of the amount of P203,850.00 for the excise taxes paid on 271,800 kilos of imported unmanufactured Brazilian F.C. tobacco, U.S. Burley Strips tobacco and Canadian F.C. tobacco. 5 On September 23, 2005, petitioner filed a judicial claim for the refund of the amount of P74,250.00 for the excise taxes paid on 99,000 kilos of imported unmanufactured Brazilian F.C. tobacco. 6 On October 7, 2005, petitioner filed another Petition for Review to claim the refund of the amount of P159,300.00 for the excise taxes paid on 172,800 kilos of imported unmanufactured U.S. Burley Tobacco strips, and 39,600 kilos of imported unmanufactured Malawi Burley T and T tobacco strips. 7 In his separate Answers8, respondent raised similarly worded Special and Affirmative Defenses, as follows: "4. Petitioner's alleged claim for refund is subject to administrative investigation by the Bureau; 5. Petitioner must prove that it paid the excise taxes so alleged; 3 C.T.A. Case No . 7245, docket, pp. 1-7. �.'91 4 C.T.A. Case No . 7267, docket, pp 1-9. 5 C.T. A. Case No . 7308, docket, pp. 1-9. 6 C.T.A. Case No . 7326, docket, pp. 1-8. 7 C.T.A. Case No. 7335, docket, pp. 21 -30. 8 C.T.A. Case No . 7151, docket, p. 51; C.T.A. Case No . 7183, docke t, p. 43; C.T.A. Case No. 7245, docket, p. 36; C.T.A. Case No. 7267, docket, pp. 34-35; C.T.A. Case No . 7308, docket, p. . �.T.A. Case No . 7326, docket, p. 26; and C.T.A. Case No. 7335, docket, p. 7. /

6. Petitioner must prove that the tobacco it imported is properly classified as unmanufactured tobacco; 7. Petitioner must prove that its imports of allegedly unmanufactured tobacco are not subject to excise tax; 8. Petitioner must prove that the claim was filed within the two (2) year period prescribed in Section 229 of the Tax Code; 9. In an action for refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund; 10. Claims for refund are construed strictly against the claimant for the same partake of the nature of exemption from taxation." On October 25, 2006, this Court issued a Resolution granting petitioner's Motions for Consolidation of C.T.A. Case Nos. 715 1, 7183, 7245, 7267, 7308, 7326, and 7335.9 During trial, petitioner presented testimonial and documentary evidence; while, respondent, through counsel, waived his right to present evidence. 10 The above-captioned cases were ordered submitted for decision on July 23, 2008, after submission of petitioner's Memorandum on May 8, 2008 and respondent's Memorandum on June 10, 2008. Submitted for this Court's resolution are the following issues: 11 1. Whether or not petitioner paid the excise taxes so alleged; 2. Whether or not petitioner's imports of tobacco in question is properly classifiable as unmanufactured tobacco; 3. Whether or not petitioner's imports of allegedly unmanufactured tobacco are not subject to excise tax; and 4. Whether or not petitioner's claim for refund was filed within the two-year prescriptive period prescribed in Section 229 of the NIRC of 1997. 9 C.T.A. Case No. 7151, docket, p. 150. 10 Resolution dated April 10, 2008 (C.T.A. Case No. 7151, docket, p. 605). 11 Stipulation of Issues, Joint Stipulation of Facts and Issues (C.T.A. Case No. 7151, docket, pp. 83-84; C.T.A. Case No. 7183, docket, pp. 96-97; C.T.A. Case No. 7245, docket, pp. 73-74; C.T.A. Case No. 7267, docket, p. 70; C.T.A. Case No. 7308, docket, pp. 72-73; C.T.A. Case No. 7326, docket, p. 69; C.T.A. Case No. 7335, docket, p. 62).

Issue on Prescription Section 229 of the National Internal Revenue Code (NIRC) of 1997 provides: "SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid." (Emphasis supplied) Below is a table enumerating the pertinent dates as borne by the Records, to wit: Class of Imported Date of Payment of Date of Filing of Date of Filing of Unmanufactured Tobacco the Excise Tax Administrative Claim Petition for Review C. T.A. Case No. 7151 February 2, 2005 February 18, 2005 Unmanufactured Canadian F.C. Tobacco February 20, 2003 Unmanufactured U.S. February 20, 2003 Burley Tobacco C.T.A. Case No. 7183 March 4, 2005 March 30, 2005 Unmanufactured Brazilian Burley Tobacco March 31 , 2003 Unmanufactured U.S. March 31 , 2003 Burley Tobacco March 31 , 2003 Unmanufactured U.S. Burley Tobacco C. T.A. Case No. 7245 April 8, 2005 May 6, 2005 Unmanufactured U.S. Burley Tobacco May 7, 2003 Unmanufactured U.S. May 7, 2003 Burley Tobacco C. T.A. Case No. 7267 June 2, 2005 June 8, 2005 Unmanufactured Brazilian Burley Tobacco June 9, 2003 Unmanufactured Brazilian June 11 , 2003 F.C. Tobacco

C. T.A. Case No. 7308 August 11, 2003 August 8, 2005 August 10, 2005 August 11, 2003 September 8, 2005 September 23, 2005 Unmanufactured Brazilian August 11 , 2003 F.C. Tobacco August 14, 2003 Unmanufactured U.S. Burley Strips Tobacco September 24, 2003 Unmanufactured U.S. September 24 , 2003 Burley Strips Tobacco Unmanufactured Canadian F.C. Tobacco C. T.A. Case No. 7326 Unmanufactured Brazilian F.C . Tobacco Unmanufactured Brazilian F.C. Tobacco C. T.A. Case No. 7335 October 6, 2005 October 7, 2005 Unmanufactured U.S. October 8, 2003 Burley Strips Tobacco October 8, 2003 Unmanufactured U.S. October 13, 2003 Burley Tobacco Unmanufactured Malawi Burley T & T Tobacco Thus, as the claims for refund both in the administrative and judicial level were filed within the two-year period, prescription has not set in. Payment ofExcise Taxes Petitioner presented testimonial and documentary evidence, proving that it paid excise taxes on the subject imported unmanufactured tobacco: Tobacco Class Quantity Amount Exhibit Description C. T.A. Case No. 7151 39,600 kgs Paid Unmanufactured Canadian P29,700.00 B (7151) Journal Voucher No. 131977, dated 02-20- F.C. Tobacco P85 ,815 .00 2003 c (7151) BIR Form 2200-T Unmanufactured U.S. 114,420 kgs. BPI Expresslink Payment Form with Burley Tobacco D (7151) FilinQ Reference No. 080300000042791 D-1 (7151) BIR Stamp indicating receipt E (7151) BIR Filing Reference No. 080300000042791 F (7151) BIR Tax Payment Confirmation H (7151) Journal Voucher No. 131978, dated 02-20- 1_(7151) 2003 L (7151) J (7151) BIR Fonnn 2200-T BIR Tax Payment Confirmation BPI Expresslink Payment Form with

K (7151) Filing_ Reference No. 080300000042799 BIR Filing Reference No. 080300000042799 C. T.A. Case No. 7183 57,600 kgs. P43,200.00 B (7183) Journal Voucher No. 132121, dated 03-31- P72 ,000 .00 2003 Unmanufactured Brazilian P57,600 .00 c (7183) BIR Form 2200-T Burley Tobacco BPI Expresslink Payment Form with D (7183) Unmanufactured U.S. 96,000 kgs. Filing Reference No. 080300000048601 Burley Tobacco E (7183) BIR Filing Reference No. 080300000048601 F (7183) BIR Tax Payment Confirmation Unmanufactured U.S. 76,800 kgs. Journal Voucher No. 132123, dated 03-31- Burley Tobacco H (7183) 2003 I (7183) BIR Form 2200-T J (7183) BPI Expresslink Payment Form with K (7183) Filing Reference No. 080300000048602 L (7183) BIR Filing Reference No. 080300000048602 BIR Tax Payment Confirmation N (7183) Journal Voucher No. 132146, dated 04-03- 0 (7183) 2003 P(7183) BIR Form 2200-T BPI Expresslink Payment Form with Q (7183) Filing Reference No. 080300000048774 R (7183) BIR Tax Payment Confirmation Filing Reference No. 080300000048774 SIR Filing Reference No. 080300000048774 C.T.A. Case No. 7245 96,000 kgs. P72,000.00 B (7245) Journal Voucher No. 132252, dated 05-07- Unmanufactured U.S. 76,800 kgs. P57,600.00 2003 Burley Tobacco c (7245) BIR Form 2200-T BPI Expresslink Payment Form with Unmanufactured U.S. D (7245) Burley Tobacco Filing Reference No. 80300000055119 E (7245) BIR Filing Reference No. 80300000055119 E (7245) SIR Tax Payment Confirmation Journal Voucher No. 132251, dated 05-07- J (7245) 2003 K (7245) BIR Form 2200-T L (7245) BPI Expresslink Payment Form with M (7245) Filing Reference No. 80300000055117 N (7245) BIR Filing Reference No. 80300000055117 BIR Tax Payment Confirmation C. T.A. Case No. 7267 57,600 kgs. P43,200 .00 B (7267) Journal Voucher No. 132379, dated 06-09- 2003 Unmanufactured Brazilian c (7267) BIR Form 2200-T Burley Tobacco BPI Expresslink Payment Form with D (7267) Filing Reference No. 80300000061127 E (7267) SIR Filing Reference No. 80300000061127 F (7267) Date June 10, 2003 stamp received by the SIR-Large Taxpayers Assistance Division II Unmanufactured Brazilian 178,200 kgs. P133,650.00 H (7267) Journal Voucher No. 132393, dated 03-11- F.C. Tobacco I (7 267) 2003 SIR Form 2200-T

J (7267) BPI Expresslink Payment Form with Filing Reference No. 80300000062255 K (7267) L (7267) BIR Filing Reference No. 80300000062255 Date June 12, 2003 stamp received by the SIR-Large Taxpayers Assistance Division II C.T.A. Case No. 7308 39,600 kgs. P29,700 .00 A(7308) Journal Voucher No. 132594, dated 08-11 - 8 (7308) 2003 Unmanufactured Brazilian BIR Form 2200-T F.C. Tobacco c (7308) BIR Filing Reference No. 080300000073649 BPI Expresslink Payment Form with D (7308) Filing Reference No. 080300000073649 E (7308) BIR Tax Payment Confirmation E-1 (7308) Date August 12, 2003 stamp received by the SIR-Large Taxpayers Assistance Division II Unmanufactured U.S. 76,800 kgs. P57 ,600 .00 I (7308) Journal Voucher No. 132596, dated 08-11 - Burley Strips Tobacco P72,000.00 J{7308) 2003 P44 ,5 50 .00 K (7308) BIR Form 2200-T Unmanufactured U.S. 96,000 kgs. L (7308) BIR Filing Reference No. 080300000073643 Burley Strips Tobacco BPI Expresslink Payment Form with M (7308) Filing Reference No. 080300000073643 Unmanufactured Canadian 59,400 kgs. BIR Tax Payment Confirmation F.C. Tobacco Q (7308) Journal Voucher No. 132598, dated 08-11 - R (7308) 2003 BIR Form 2200-T s (7308) BIR Filing Reference No. 080300000073639 BPI Expresslink Payment Form with T (7308) Filing Reference No. 080300000073639 BIR Tax Payment Confirmation u (7308) Journal Voucher No. 132620, dated 08-14- 2003 y (7308) BIR Form 2200-T BIR Filing Reference No. 080300000075106 z (7308) BPI Expresslink Payment Form with Filing Reference No. 080300000075106 AA (7308) BIR Ta x Payment Confirmation 88 (7308) cc (7308) C. T.A. Case No. 7326 39,600 kgs. P29,700.00 8 (7326) Journal Voucher No. 132754, dated 09-24- P44,550.00 2003 Unmanufactured Brazilian c (7326) SIR Form 2200-T F.C. Tobacco BPI Expresslink Payment Form with D (7326) Filing Reference No. 80300000082744 Unmanufactured Brazilian 59,400 kgs. BIR Filing Reference No. 80300000082744 F.C. Tobacco E (7326) BIR Tax Payment Confirmation F (7326) Journal Voucher No. 132756, dated 09-24- 2003 I (7326) BIR Form 2200-T J (7326) BPI Expresslink Payment Form with K (7326) Filing Reference No. 80300000082745 BIR Filing Reference No. 80300000082745 L {7326) BIR Tax Payment Confirmation M (7326) I~��.n'~I ! \

C. T.A. Case No. 7335 96,000 kgs. P72,000.00 c (7335) Journal Voucher No. 132801, dated 10-08- Unmanufactured U.S. 76,800 kgs. P57 ,600 .00 2003 Burley Strips Tobacco 39,600 kgs. P29,700.00 D (7335) SIR Form 2200-T E (7335) BIR Filing Reference No. 080300000083795 Unmanufactured U.S. E (7335) BPI Expresslink Payment Form with Burley Tobacco Filing Reference No. 080300000083795 G (7335) BIR Tax Payment Confirmation Unmanufactured Malawi Journal Voucher No. 132799, dated 10-08- Burley T & T Tobacco J (7335) 2003 K (7335) BIR Form 2200-T M (7335) BIR Filing Reference No. 080300000083798 L (7335) BPI Expresslink Payment Form with Filing Reference No. 080300000083798 N (7335) BIR Tax Payment Confirmation Journal Voucher No. 132809, dated 10-13- Q (7335) 2003 R (7335) BIR Fomn 2200-T BPI Expresslink Payment Form with s (7335) Filing_ Reference No. 080300000085402 BIR Filing Reference No. 80300000085402 T _{_7335) BIR Tax Payment Confirmation u (7335) In the absence of convincing proofs to the contrary, the above-enumerated pieces of documentary evidence establish the fact of payment of excise taxes on the subject imports. Imported tobacco leaves are considered manufactured and subject to Excise Tax Section 129 of the NIRC of 1997 imposes excise taxes to things imported, to wit: "SEC. 129. Goods subject to Excise Taxes. - Excise taxes apply to goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to t hings imported. The excise tax imposed herein shall be in addition to the valued-added tax imposed under Title IV. For purposes of this Title, excise taxes herein imposed and based on weight or volume capacity or any other physical unit of measurement shall be referred to as 'specific tax' and an excise tax herein imposed and based on selling price or other specified value of the good shall be referred to as 'ad valorem tax~ " (Emphasis supplied) In relation thereto, Section 144 of the NIRC of 1997 provides: "SEC. 144. Tobacco Products. - There shall be collected a tax of Seventy-five centavos (P0 .75) on each kilogram of the following products of tobacco: ' )9.., I f

(a) Tobacco twisted by hand or reduced into a condition to be consumed in any manner other than the ordinary mode of drying and curing; (b) Tobacco prepared or partially prepared with or without the use of any machine or instruments or without being pressed or sweetened; and (c) Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco. Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco may be transferred, disposed of, or otherwise sold, without prepayment of the excise tax herein provided for under such conditions as may be prescribed in the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, if the same are to be exported or to be used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product. On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, Sixty centavos (P0.60)." The above-quoted Section imposes excise tax on tobacco products. "Product," in the absence of definition in the NIRC, ordinarily means "a thing or substance produced by natural process or manufacture."12 As admitted and described in petitioner's Formal Offer of Evidence, the subject imports are threshed tobacco leaves.13 An examination of the samples of threshed tobacco shows that the tobacco leaves are not in their original state and have undergone a process. 14 This is confirmed by the Vice-President of petitioner's Leaf and Product Department, Mr. Lionel H. Small, who testified as follows: 15 "Q.S.: xxx Can you please tell us what happens when tobacco is first harvested? A: Freshly harvested tobacco has very high moisture content. Thus, in order to prevent mold growth, the farmers have to dry the tobacco leaves. This is done via heat in a barn or what is referred to as flue- curing; or via air-shade curing; or via sun drying. Q.9.: After the fresh tobacco leaves are dried, what, if any, is added thereto? 12 The Oxford Encyclopedic English Dictionary. 13 Docket, p. 294. 14 Exhibits "A-Consolidated" and " 8-Consolidated." 15 Exhibit " E-Consolidated " . ~' 9 8

A: Aside from the heat or air, nothing else is applied or added to the tobacco. There are no additives or preservatives used in this process. Q.lO.:What happens to the tobacco leaves after they are dried? A: The only thing that changes in it is the moisture content, which is reduced to roughly eighteen percent (18%). Q.ll.:Piease tell us, in essence, what is the purpose of drying the leaves? A: The only purpose of drying the leaves is to reduce the moisture content so as to give the farmers some time flexibility to sell these to the tobacco dealers. Otherwise, molds will grow fast on the leaves and be ruined. Q.12.:As this point, what use can these dried tobacco leaves be to the end-consumers? A: The end-consumers cannot use the tobacco leaves at this point because they have to undergo processing before they can be smoked. Q.13.: What do the farmers do with the dried tobacco leaves? A: The farmers sell these leaves to the tobacco dealers. Q.14.: What happens to the tobacco leaves after the farmers sell them to the dealers? A: Since the dried tobacco leaves bought from the farmers are still whole tobacco leaves, the dealers have to thresh them. Q.lS.:What do you mean by 'thresh'? A: Threshing is when the tobacco leaf is cut into three (3) portions and the lamina or the midrib is taken out since the lamina's moisture content is high. Then, the leaf is dried again to a more stable state of about eleven percent (11%) moisture content. Q.16.:What is added to the leaves at this point if any? A: Aside from the heat, there are no additives or preservatives used in this process. Q.17.:Piease tell us the purpose of threshing? A: Its purpose is only to further reduce the moisture content of the tobacco to extend the storage period of the same. Q.18.:Why do the tobacco dealers have to reduce the moisture content even more? A: The tobacco leaves remain with the tobacco dealers for about twelve (12) months before these are bought by manufacturers. If the moisture content is not controlled, molds will grow on the leaves. Q.19.:At this stage, what is the use of the tobacco leaves to the end-consumers? A: The end-consumers cannot use the tobacco leaves at this stage as they have not yet undergone the processing needed for them to be consumable.

Q.20: So how would you classify the tobacco leaves at this point? A: The tobacco leaves are still considered as 'raw leaf tobacco' since in this state, nothing has changed in the tobacco leaves except that the moisture content has been reduced and the lamina removed. No additives or preservatives have been added to them. Besides, the cut portions of the leaves are too big for smoking purposes. Q.21.:What happens after the tobacco leaves are threshed? A: The tobacco dealers then sell these to the manufacturers like La Suerte. XXX XXX XXX Q.24.:What does La Suerte do with the threshed tobacco? A: La Suerte blends the imported tobacco with locally grown tobacco under a process called 'casing.' Q.25.:Can you explain to us what 'casing' involves? A: This is when the manufacturing process starts. It involves the adding of different flavours to the tobacco, like coco, sugar, honey, licorice, etc. Q.26.:After casing, what does La Suerte do with the tobacco? A: The tobacco is placed in a shredder and cut into thin strips or what we call 'cut-rag' or 'cut-filler.' Q.27.:What happens to the cut-rag? A: The cut rag is the end form of the tobacco that is used to make cigarettes or cigars. Thus, in this form, La Suerte now packs it into cigarettes. Q.28.:If a sample of cut-rag is shown to you, will you be able to identify it? A: Yes. XXX XXX XXX Q.30.:So, what is the final form of tobacco that La Suerte manufactures? A: The final product is the cigarette. XXX XXX xxx" From harvest, tobacco leaves undergo manufacturing process, which includes the separate processes of drying and threshing. Thus, from their original state, tobacco leaves are dried to remove the moisture. After moisture is removed, the threshing begins, whereby the leaves are separated from stems. The threshing process is not as simple as it was presented by the witness and not as "sup rf, ia l" as petitioner argues. The threshed

tobacco leaves are products by themselves or, to say the least, prepared or partially prepared; taxable under Section 144 of the NIRC of 1997. Inasmuch as they have been modified or their natural substances have been changed, so that they may become articles of value or use, such leaves should not, therefore, be considered as "unmanufactured."16 Further, contrary to petitioner's claim, the Authorities to Release Imported Goods (ATRIGs) do not operate against the imposition and collection of excise taxes due from petitioner's importation of the tobacco leaves. As previously discussed, Section 129 of the NIRC of 1997 imposes excise taxes to things imported. Revenue Memorandum Order (RMO) No. 35-200217 dated October 28, 2002, merely requires every importation to be covered by ATRIG, regardless of whether the importation is subject to excise tax. Pertinent portions of said RMO read: "1. An Application for ATRIG (Annex 'A') for value-added tax purposes shall be filed in duplicate with the Revenue District Office (RDO) having jurisdiction over the port of entry. For excise tax purposes, however, the Application for ATRIG shall be filed with the Excise Tax District Office (ETDO) where the taxpayer-importer is registered or required to be registered. The application for ATRIG shall be distributed as follows: XXX XXX XXX Each importation shall be covered by a separate application for ATRIG. In cases where the importation involves articles of the same kind but are covered by two or more Bills Of Lading issued to the same importer under the same vessel, the consolidated application may be accepted and processed. The application for ATRIG shall be notarized and properly accomplished and signed by the importer or his duly authorized representative with the prescribed documentary stamp affixed thereon. XXX XXX XXX 4. For excise tax purposes, the ATRIG shall be issued for all importations of articles subject to excise tax (whether exempt or taxable), including the raw materials in the production thereof, as well as the machineries, equipment, apparatus or any mechanical contrivances especially used for its assembly/production. xxx." (Emphasis supplied) 16 To manufacture is to modify or to change natural substances, so that they become articles of value or use (Words and Phrases, Permanent ed ., 1940, vol. 26, p. 610). 17 "Prescribing the Guidelines and Procedures in the Processing and I ssuance of AUTHORITY TO RELEASE IMPORTED GOODS (ATRIG) for Excise and Value-Added Tax Purposes."

There is likewise no merit in petitioner's contention that "Revenue Regulations (RR) V-3918 Chapter V, as amended, does not include imported tobacco leaf as among the tobacco products on which specific taxes are payable before the same are released from the customhouse" and cited Section 61, Chapter V thereof. Section 2(m) of RR 17-6719 dated May 2, 1967, has defined "partially manufactured tobacco" to include "stemmed leaf"20 and "machine scrap tobacco."21 In relation thereto, Section 43 of RR 17-67 provides: "Section 43. Tobacco exempted from specific tax. -No specific tax shall be collected on the following : (a) Leaf tobacco and partially manufactured tobacco, except imported leaf tobacco, unless entered in the L-7 official register book. (b) Manufactured products of tobacco for export and or use by the Armed Forces of the Philippines or the United States Armed Forces, and other entities specifically exempted by law." (Emphasis supplied) Tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. The taxpayer has the burden of proving that it is in fact covered by the exemption being claimed. In case of doubt, non-exemption is favored.22 Inasmuch as petitioner failed to discharge its duty of proving its claims, the instant Petitions must fail. WHEREFORE, the instant Petitions for Review are hereby DENIED for lack of merit. SO ORDERED. 18 The Tobacco Products Regulations, dated September 29, 1954. 19 Tobacco Revenue Regulations on leaf, scrap, other partially manufactured tobacco and other tobacco products; grading, classification, inspection, shipments, exportation, importation and the manufacturers thereof under the provisions of Act No. 2613, as amended. 20 "Handstripped tobacco, clean, good, partially broken leaf only, free from mold and dust." 21 "Machine-treshed, clean good tobacco, not included in any of the above terms, usable in the manufacture of tobacco products." (Emphasis supplied) 22 Republic of the Philippines, eta/. vs. Caguioa, eta/., G.R. No. 168584, October 15, 2007, 536 SCRA 193. (] 02

WE CONCUR: (L__._- ~ � ~ ERNESTO D. ACOSTA Presiding Justice CAESAR A. CASANOVA Associate Justice CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Division of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution . L.Q~ ERNEST~D.ACOSTA Chairperson, First Division Presiding Justice 8G3